Monday, March 15, 2010

Paul "W." Krugman

Krugman continues to outdo himself. In this article he somehow ends up saying: "In short, right now America has China over a barrel, not the other way around." Right, just like I have my credit card companies right where I want them.

Here's a fun experiment: Go through this Krugman column and replace "China" with "Iraqn," and "import surcharge" with "bomb the crud out of them." The Krugman op ed suddenly turns into a Max Boot piece.

I don't expect an answer to this, as I know you're very busy, but are you in anyway suggesting that China is either not manipulating its currency exchange rate, or that doing so doesn't create market distortions that might hurt us?

Well, yes, you *do* have your credit card companies over the barrel. Let's say you stop paying them tomorrow. What are they going to do to you? Stop lending you money? But you're already maxed out on your credit cards and can't pay what you owe already, so how's that going to hurt *you*? It's going to hurt the credit card companies much more if you default!

Regarding inflation, a country which artificially inflates its currency -- like China is doing right now by artificially pegging its currency below market exchange rates -- gives that country an edge in the export market. $1 and 3.78 renminbi will buy about the same amount of "stuff", but the actual exchange rate is at 6.81 renminbi to the dollar -- the remainder of the renminbi needed to do that exchange is simply printed, i.e., inflated. The net effect is that Chinese entrepeneurs buy 3.78 renminbi worth of stuff, sell it to the USA for 75 cents, then trade the 75 cents for 5.11 renmimbi, thereby making a handy 1.33 renmimbi profit. In other words, inflation allows the Chinese to artificially subsidize their exports.

China is critically dependent upon the export market to employ Chinamen right now. If China inflated U.S. dollars by dumping them on the market in exchange for holdings in some other currency, suddenly their artificially-inflated currency would be pegged to *another* artificially-inflated currency -- i.e., like adding -1 and 1 together, it'd cancel out China's export advantage that's caused by them artificially inflating their currency with their unrealistic dollar peg.

So yeah, it'd cause China to have massive, massive unemployment as their exports ground to a halt, followed by social instability as the Iron Law of Economics kicked in -- i.e., that there is a bottom to wages, the bottom being the lowest wage necessary in order to keep people from starving to death. People don't voluntarily starve to death -- either massive repression is necessary to starve them (see, Ukraine, 1930's), or they overthrow the government as part of massive food riots. Somehow I doubt the Chinese are interested in seeing just how revolutionary their new cadres, who've been introduced to the free market for the first time in half a century and are liking it just fine, will get if they see their material advances suddenly yanked out from underneath them because the Chinese government decided to play a game of chicken with the United States... so while Krugman is perhaps being a bit too concise, he is, essentially, right here. The *last* thing that the Chinese want to see is the U.S. dollar inflating away their export advantage... so dumping their dollar holdings would hurt them just as badly as it would hurt the USA. Stalemate.

Badtux, the increase in material standards enjoyed by the Chinese has not come about thanks to the artificial subsidization of exports, it has come about through economic liberalization unleashing a huge productive capacity which was previously bound by stalinist policies.

The loss of artificially created export jobs would no more send the Chinese economy into a death spiral than the loss of millions of military jobs at the end of World war 2 sent the american economy into a death spiral.

Although dumping dollars would engender large changes in both the Chinese and US economies the situation can hardly be called a stalemate. The two countries are in near mirror image positions. It is a much smoother ride to transition from an economy with artificially high exports produced by currency meddling than it is from an economy with artificially high consumption produced by currency meddling.

Sooner or later the Chinese government are going to get it in their heads that the whole point of production is consumption and the chinese are going to start consuming more of what they produce rather than exchange it for increasingly worthless dollars.

Indeed, the problem in the Chinese economy today is a demand problem, how Keynesian of you :). A significant proportion of that is a social safety net problem, Chinese do not consume, they save, because if they get sick they have to pay cash to their doctors, and there is no real retirement system like pensions or Social Security. This does help cushion shocks like their recent shocks where significant numbers became unemployed when their exports dropped, since those people can rely on their savings for some time, but also makes China reliant upon those exports to keep people employed since otherwise you will run into the Iron Law.

The Chinese technocrats who run things do recognize that this subsidizing of exports is not a long-term solution and have a long-term plan for dealing with it, but in the mean time the exports are a significant part of that plan since the exports are what bring in the dollars to buy the oil and technical goods needed to modernize their economy. One thing the Chinese technocrats discovered over the past sixty years is that economics is hard. Folks like Karl Marx, Ludwig von Mises, and John Maynard Keynes may have thought they had simple answers to these hard questions, but as with most simple answers to hard questions, they were the answers of a blind man groping the trunk of an elephant and proclaiming that an elephant is like a snake.

Do I think the Chinese technocrats are doing the right thing? Well... I think they believe they are doing the right thing for China. Though I have more contact with Chinese people in China than the average denizen here due to my employer's outsourcing activities there, I have no crystal ball. One thing I do notice is that they have a very huge fetish for social order. Singapore is not such a clean and tidy city because it is a dictatorship, it is such a clean and tidy city because it is basically Chinese, and that's how Chinese like things (thus the ancient Chinese curse, "may you live in interesting times"). The notion of the Chinese making a sudden move to eliminate their export advantage before they've increased their domestic consumption of goods and services to the point where they no longer need that export advantage in order to keep people employed doesn't make sense to me, or presumably to Paul Krugman, because of that Chinese proclivity towards maintenance of social order. Chairman Mao was a once-in-a-generation thing for the Chinese and they are *not* interested in that sort of disorder again...